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Commercial contract liability: to protect profit and provide some certainty regarding contract risk, a key element of all commercial contracts for goods and services is the allocation of contract liabilities among the parties.

You have recently been hired as a contract professional for the Red Electronics Company (Red Electronics). You are responsible for all of Red Electronics' contracts for its main line of business, involving the manufacture and sale of microchips and circuit boards that power numerous high-tech items. You also have been asked to take on an additional responsibility for Red Electronics' new technical services division, a business unit that sells consulting services relating to the company's substantial technical expertise in electronic components. In the last couple of days, new customers have surfaced who are interested in entering into valuable contracts for the sale of Red Electronics' electronic components and consulting services. Unfortunately, these new customers are concerned with the contract risk they must assume under Red Electronics' standard form contracts for electronic components and consulting services. That is, your new customers wish to negotiate for themselves a more favorable allocation of the various liabilities that may arise under their contracts with Red Electronics. Despite the possibility that you are agreeing to assume too much contract risk on behalf of Red Electronics, which could result in unpredictable and substantial liability that could hurt Red Electronics' profitability (or worse), your superiors expect you to negotiate mutually acceptable contracts with these new customers or else. What do you do?

Traditionally, the most common commercial contract terms for the allocation of the parties' relative responsibility for liabilities arising under a contract include limitation of liability, indemnification, and warranty (collectively, the "risk allocation terms"). These traditional risk allocation terms address the allocation of risk for liabilities that may arise under a contract for breach of contract or injury. When properly integrated together as part of a commercial contract for goods or services, these risk allocation terms can form a cohesive and comprehensive statement of the parties' intent concerning the extent to which each party is liable in the event any breach of contract or injury occurs.

Your circumstances are not uncommon in modem commercial contracting. Nearly every company regularly enters into commercial contracts for goods and services entailing risks that contract performance will result in substantial liabilities. Whether a contract provides that a company must assume these liabilities, or allows that company to avoid or limit such liabilities, can be the difference between a profitable contract and a contract that results in serious financial harm. Thus, to protect profit and provide some certainty regarding contract risk, a key element of all commercial contracts for goods and services is the allocation of contract liabilities among the parties.

Because parties to commercial contracts often disagree on how to allocate liabilities for breach of contract and injury arising under the contract, all contract professionals must understand the general nature of each of the risk allocation terms and how these terms may fit into their respective company's risk management scheme. With an understanding of these risk allocation terms, contract professionals will be better equipped to negotiate with their contracting counterparts and can more actively participate in managing the liabilities arising under their own contracts.

Traditional Risk Allocation Terms

Every commercial contract has unique risks. Moreover, the specific risk allocation terms of each commercial contract must consider any relevant standard industry terms as well as the individual requirements and risk tolerances of the parties. Thus, the appropriateness of any risk allocation term must be determined only on a case-by-case basis. Nevertheless, some basic observations may assist a contract professional in negotiating and drafting limitation of liability, indemnification, and warranty terms, as discussed below.

Limitation of Liability

Limitation of liability terms limit the amount or type of damages available to a party under a contract. (1) Without such limitation of liability language as part of a contract, the parties to the contract are free to seek damages to compensate for all legally recognizable harms caused by a breach of contract or injury arising under the contract. For breach of contract, for example, the parties may seek general, incidental, and consequential damages.

General damages for breach of contract attempt to compensate the aggrieved party for the direct economic impact of the breach, e.g., direct costs to reprocure an item or replace a service contractor. Incidental and consequential damages relate to compensating the aggrieved party for idiosyncratic harms caused by a breach. Notably, consequential damages can include compensation for future lost profits or business interruption costs caused by a breach. (2)

Additionally, absent any limitation of liability language in a commercial contract, parties may seek compensatory damages for any injury caused by a negligent or other wrongful act committed in the performance of the contract. (3) In rare cases, parties may seek punitive damages to penalize a wrongdoer, especially for egregious conduct under the contract in excess of any compensatory damages for the injury.

Because limitation of liability terms in a commercial contract often limit or deny the parties' right to seek otherwise lawfully permitted damages to compensate for harms caused by breach of contract or injury arising under the contract, such language is strictly construed. (4) It is vital, therefore, that limitation of liability terms are drafted with clear and precise language that accurately conveys the parties' intent.

The language contained in limitation of liability terms for commercial contracts is diverse and varies widely, depending upon the particular contract risks, business objectives of the parties, and other circumstances. It is possible, however, to characterize the most common limitation of liability language as relating to: (a) exclusive remedies, (b) exclusions or ceilings on damages, (c) liquidated damages, and (d) exculpatory terms. Each of these limitations is not mutually exclusive from the other limitations; therefore, combinations of these basic limitations are likely to be incorporated in the limitation of liability terms included in commercial contracts.

Exclusive Remedies

Parties may agree that the specific damages or remedies authorized under a contract, if any, are the "exclusive remedies" available to the parties in the event of a breach of contract. (5) For example, the parties can stipulate that the exclusive remedy for any breach of contract is the cancellation of the contract with a return of any goods delivered and any moneys paid. Thus, exclusive remedy language can provide the parties a desired level of certainty as to the result of any breach of contract.

Importantly, for a contract involving the sale of goods subject to Article 2 of the Uniform Commercial Code (the "UCC Article 2"), an exclusive remedy may be unenforceable, if it fails its essential purpose of redressing a contemplated particular loss from a breach of contract. (6) The classic example of an exclusive remedy rendered unenforceable for failing its essential purpose is an exclusive remedy of "repair or replacement" of any defective goods delivered to a buyer that is ineffective because the buyer is unable to actually receive, within a reasonable time, any repair or replacement from the seller. (7)

Where an exclusive remedy fails in its essential purpose, the exclusive remedy is invalid and the aggrieved party may be entitled, depending on the relevant jurisdiction, to any remedy available under the UCC Article 2 for breach of contract. (8) Thus, an improper exclusive remedy can render other limitation of liability language ineffective, and thereby expose a party to unanticipated liabilities. (9) Accordingly, in negotiating and drafting exclusive remedy language, a contract professional should confirm that the exclusive remedy is sufficient to reasonably redress the specific breach to which it applies, and that it will be available to an aggrieved party, if required.

Prohibitions or Ceilings on Damages

Consequential damages are commonly prohibited because such damages involve a degree of subjectivity and speculation as to the effect of the breach of contract on the aggrieved party's financial interests that is difficult to quantify, e.g., future lost profits. Moreover, the subjective and speculative nature of consequential damages can often result in liability that far exceeds the value of the contract under which such damages may arise. A contract professional, therefore, may wish to include a prohibition of consequential damages in a contract to provide some protection that the total liability in the event of a breach of contract will not vastly exceed the value of the contract.

Parties to commercial contracts commonly prohibit the availability of damages under a contract in the event of a breach of contract or injury. (10) The most common example of a prohibition on damages in commercial contracts is the prohibition of consequential damages for breach of contract. (11)

In lieu of a prohibition on damages, or in conjunction therewith, parties may agree to place a dollar ceiling on the amount of total damages available under the contract in the event of breach or, in some cases, even for injury caused by a negligent or other wrongful act arising under the contract (the "damages ceiling terms"). (12) For instance, damages ceiling terms may limit the amount that either party can recover in damages for breach of contract or injury arising under the contract to the total contract price or amounts paid under the contract, whichever is greater. Additionally, damages ceiling terms can simply state an amount certain, such as $1 million, as the maximum total amount of damages the parties' can recover under the contract.

Contract professionals may wish to use prohibition of damages and damages ceiling terms wherever it is appropriate to set a predictable or maximum limit on the parties' total liability for damages under the contract. Conversely, contract professionals should consider removing language prohibiting or placing a dollar ceiling on damages where the availability of all lawfully permitted damages is the most appropriate way to protect against a potential breach of contract. Similarly, a prohibition or ceiling on damages may be inappropriate, if the absence of the availability of damages could cause one of the parties to shoulder an unacceptable financial burden if a breach occurs.

Liquidated Damages

Liquidated damages are a stipulated amount in a commercial contract that the parties set as the reasonable damages owed to the aggrieved party in the event of a specific breach of contract. (13) In certain circumstances, the parties may wish to include liquidated damages terms to permit the prompt recovery of damages when specific breaches of the contract occur, or to encourage timely and specific performance of the contract requirements. Liquidated damages terms are also commonly used to value otherwise speculative damages, in advance, to avoid disputes over the amount of damages owed in the event of certain common breaches of the contract. In a construction contract, for example, a liquidated damages term might provide that the contractor must pay $10,000 in liquidated damages for every day that the construction required under the contract remains incomplete beyond the desired completion date.

An important restriction on liquidated damages terms is that such terms must attempt to fairly estimate the actual damages of the specific breach to which the term relates. If the parties stipulate to liquidated damages that are unduly high in comparison with a reasonable estimate of the actual damages caused by a breach, the liquidated damages terms may be considered an unlawful "penalty," rendering the terms unenforceable. (14) In a contract for the sale of goods subject to the UCO Article 2, if the parties agree to liquidated damages that are too low compared with the actual damages caused by the breach, the liquidated damages language of the contract also may be rendered invalid.

Such liquidated damages that are too low may be rendered invalid because the terms would improperly encourage grievous intentional breaches of contract in some cases and, thereby, the terms would fail their essential purpose to redress the actual harms to the aggrieved party. (15) Thus, it is critical that a contract professional ensures that the parties accurately estimate anticipated actual damages for the specific breach addressed by the liquidated damages term.

Exculpatory Terms

The parties may seek to preclude any liability for their own negligent conduct committed during the performance of the contract (the "exculpatory term"). (16) In general, such exculpatory terms are valid, so long as the terms do not relate to personal injuries sustained by consumers in a contract subject to the UCC Article 2, (17) or attempt to prohibit liability for grossly negligent or intentional conduct. (18) Thus, exculpatory terms that bar the recovery of ordinary property or commercial damages caused by merely negligent conduct arising under a contract are enforceable. (19)

Nevertheless, exculpatory terms are disfavored under the law of many jurisdictions. In fact, exculpatory terms are invalid in some jurisdictions for public policy reasons, where special public interests exist compelling the denial of the parties' ability to avoid liability for their wrongful conduct. The types of contract relationships where exculpatory terms may be invalid for public policy reasons include contracts for construction, employment, or public services. Exculpatory terms may also be invalid in other types of contracts where the terms are deemed unconscionable because a stark disparity of bargaining power exists between the contracting parties. (20)

Even in jurisdictions where exculpatory terms are valid, the applicability and scope of the terms may be strictly construed. Accordingly, careful review of the law of the relevant jurisdiction is required when drafting an exculpatory term. In addition, because the term will be strictly construed, the intent of the parties to an exculpatory term must be drafted in clear and unmistakable language.

Indemnification

Indemnity terms allow the parties to shift certain risks or liabilities from one party to another under a contract. An indemnity is a contractual or equitable right under which one party assumes liability for current or future loss or injury incurred by another party due to the conduct of that party or a third party. (21) A party who is indemnified or protected by the other under an indemnity term is an "indemnitee." A party who is bound to indemnify or protect the other is an "indemnitor."

Types of Indemnity Provisions

There are generally two types of indemnification: indemnity against liability and indemnity against loss. Indemnity against liability triggers the indemnitor's obligation once the indemnitee becomes liable, even if the indemnitee has not experienced actual loss or damage. (22) In contrast, indemnity against loss triggers the indemnitor's obligation when the indemnitee actually incurs expense. Thus, an indemnitee must suffer actual loss before the indemnitor's obligation is realized, even if liability is apparent. (23) A contract may include both types of indemnity provisions.

A grant of indemnity for loss may be more favorable for an indemnitor seeking to limit its liability, since the indemnito's obligation is more limited under this type of indemnity. Alternatively, when attempting to maximize the risk allocation to the other party, an indemnitee should seek an indemnity for liability, as this type of indemnity is generally more broad in scope. Where an indemnity term is ambiguous, courts will interpret the intent of the parties based on the language used to determine whether an indemnity provision is one against liability or loss.

In addition to express indemnity set forth in the terms of a contract, indemnity may also be implied. A duty and obligation to indemnify another may be implied based on the circumstances and the relationship of the parties. An implied indemnity may arise, for example, where a legal relationship already exists between the parties, such as in a goods or services contract. Implied indemnity can also exist when there is an underlying principal-agent relationship between the parties.

Indemnity Against Negligence

Although disfavored for public policy reasons, terms that indemnify a party for a negligent act are generally upheld, unless they promote a breach of duty to the public. Similar to limitation of liability terms, indemnity terms for negligent acts are strictly construed. Thus, in order for such an indemnity term to be valid, it must "clearly and unequivocally" state that it applies to negligent acts, or demonstrate through its language that the negligence of the indemnitee was expressly considered by the parties. (24)

Numerous jurisdictions have adopted statutes limiting a party's ability to shift liability for their own negligent behavior to another party and rendering indemnity clauses for a party's sole negligence unenforceable. These statutes are primarily geared toward the construction industry, ensuring that each party to a construction contract will be responsible for its own negligent acts, and thereby promoting safety and protecting employees. (25) When considering including an indemnity clause related to negligence in a contract, the drafter must first consult law in the applicable jurisdiction. Even if the law permits indemnity provisions for negligent acts, the drafter must be careful to clearly state that the provision applies to negligent acts and choose clear and concise language to express the intent of the parties involved.

Indemnity Against Intentional Wrongs and Illegal Acts

Under the law in most jurisdictions, indemnity provisions for intentional wrongs are invalid because such clauses violate public policy. Specifically, any provision or clause that allows one to gain profit or acquire property by taking advantage of his/her own improper behavior will not be enforceable. (26) Similarly, indemnity clauses for unlawful acts are also invalid. Under some circumstances, however, indemnification for unlawful acts may be valid, if the illegality is unknown to the parties at the time of contracting, the provisions do not encourage crime, or the unlawful act has already been committed. (27)

Indemnification and Insurance Coverage

Insurance provisions and indemnity provisions are two very different risk allocation tools. One mechanism for an indemnitee to strengthen indemnity terms, however, is to require that the indemnitor purchase contractual liability insurance that covers the risk or loss or injury subject to the indemnity. (28) This may be facilitated by including the indemnitee as a named insured on the relevant insurance policy of the indemnitor. Under these circumstances, the indemnity provisions should include language providing that the indemnitee receive documentation regarding the existence of the insurance policy, as well as notification in the event of modification or termination of the policy. (29)

Indemnification and Limitation of Liability

While indemnification and limitation of liability address contract risk differently, they must be considered together when drafting contract language to ensure that each retains its purpose and meaning in the context of the risk allocation framework provided under the contract as a whole. In particular, if the parties intend that the indemnity terms are not to be included in any general limitation of liability set forth under the contract, then that intention should be explicitly stated as an exception to the language of the limitation of liability term. (30)

Similarly, if the parties intend that the indemnity provisions are subject to any general limitation of liability, that intent should likewise be specifically stated in the language of the limitation of liability term. (31) Moreover, careful attention should also be paid to any language related to limitation of remedies to ensure that indemnity provisions and limitation of remedies are not in conflict within the contract. (32)

Indemnity Provisions

Commercial contracts include indemnity provisions for a variety of reasons. One reason is that one party may not be able to appropriately manage a contract risk due to uncertainty. For example, in a situation involving an injury to an employee or other third party caused by the negligent conduct of one party, the other party may assume, as an indemnitor, the risk and financial burden that may arise. (33) Under these circumstances, the indemnitor usually is in a better position financially to absorb the cost.

Another important reason for an indemnity term relates to a party's ability (or inability) to manage risk because of lack of control of the subject matter of the indemnity. For example, in a software licensing agreement, the licensee (or buyer) of software generally is not in a position to control whether or not copyright and patent infringement issues exist.

Thus, the licensee's lack of control over copyright or patent infringement may necessitate an indemnity provision providing that the licensor (or seller) of the software will indemnify the licensee from any potential claims by third parties against the licensee arising Out of the licensee's use of that particular software. (34) Such a provision serves the purpose of allocating the risk to the licensor (or seller) of the software, who presumably has more control over the software product than the licensee (the buyer), and thus is in the best position to manage the potential risk that the product may infringe the copyright or patent interests of third parties.

Drafting Considerations

Careful attention to detail should be used when drafting indemnity provisions. Although not an exclusive list, some examples of protections that should be considered and used where appropriate include: notice of claim provisions; a requirement that the indemnitee mitigate damages or act reasonably; a requirement that the indemnitee cooperate in the defense of the claim; an agreement that the indemnitor control or participate in the defense; specific language regarding expenses of defenses, including attorneys fees; and approval rights of the parties regarding any potential settlement of the claims. (35) In any case, indemnity terms, like other risk allocation terms, should be carefully drafted to include clear and unambiguous language stating the intent of the parties, such as the scope of the indemnity term and any limitations on the applicability of the indemnity obligation. To this end, the term "indemnity" should be explicitly included in the indemnity provision.

Warranties and Disclaimers

Generally, a warranty is an assurance or guarantee by a seller on which the buyer can rely, and it constitutes a promise to indemnify the buyer if the warranted fact proves untrue. (36) A disclaimer, on the other hand, is language used to limit or eliminate the seller's liability to the buyer for warranty. (37) It is important for contract professionals to know and understand the limits of warranty coverage and how to effectively limit liability through the use of disclaimers. (38)

The Goods-Services Distinction

The first step in identifying possible warranty or disclaimer requirements is determining whether the subject matter of the contract is a good or a service. Contracts for the sale of goods are subject to special UCC Article 2 warranty rules, whereas contracts for services are subject only to the relatively limited common law of contract warranty rules. (39) The importance of this distinction is that, under the UCC Article 2, it is more likely that warranty coverage will be extended through invocation of the implied warranties.

Some contracts, known as mixed or hybrid contracts, contain both goods and services. In these instances, questions arise concerning whether the broad implied warranty coverage of the UCC Article 2 should apply. Some jurisdictions have adopted a predominate purpose test. In these jurisdictions, the predominate purpose of the transaction, either a sale of goods or services, will determine whether the UCC Article 2 applies to the entire contract. (40) In other words, if the predominate purpose of the contract is a sale of goods, the UCC Article 2 warranties will apply to both the goods and the services aspects of the contract. Conversely, if the predominate purpose of the contract is a sale of services, the UCC Article 2 warranties will not apply.

By comparison, other jurisdictions follow an approach that fragments the contract's warranty coverage. (41) In these instances, the goods portion of a contract is subject to the UGC Article 2 warranty coverage, whereas the service aspects of the same contract are not.

The Express-Implied Distinction

Warranties appear in two major varieties: express and implied. Express warranties arise both under the UCC Article 2 and at common law where the seller has provided a description of the goods, made an affirmation of fact about the goods, or conveyed a promise that forms the basis of the bargain. (42) Because there is no formally recognized language that serves as a prerequisite to the creation of an express warranty, the seller wanting to avoid the conferral of an express warranty must resist making broad assertions in the course of the sale.

One helpful liability avoidance technique is to include language in the written contract that limits or disclaims the conferral of any express warranties. For example, a provision of the contract might simply state, "the terms of this contract do not anticipate any express warranties and, therefore, all express warranties are disclaimed." Alternatively, a contract term might provide, "all express warranties except those specifically set forth in paragraph 'x' are disclaimed, and paragraph 'x' contains the only express warranties anticipated under this contract."

Implied Warranties of UCC Article 2

In a sale of goods, the UCC Article 2 implies certain warranties into every contract unless such implied warranties are specifically disclaimed. In other words, if a seller does not disclaim the implied warranties of the UCC Article 2, the warranties exist as terms of the contract whether explicitly stated or not. The implied warranties of the UCC Article 2 include the warranties of merchantability, (43) fitness for a particular purpose, (44) title, (45) and against infringements. (46)

(1) Implied Warranty of Merchantability

The implied warranty of merchantability provides that in every sale by a merchant dealing in goods of the kind sold, there is an implied warranty that the goods are fit for ordinary use. For example, the implied warranty of merchantability would require that a copy machine actually make copies. (47) In order to disclaim the implied warranty of merchantability, a seller must ensure the disclaimer language is conspicuous and specifically mentions merchantability. The "as is" sale, providing that the buyer must accept the goods with any flaws or defects that may exist, presents the classic example of a waiver of the implied warranty of merchantability.

(2) Implied Warranty of Fitness

A corollary to the implied warranty of merchantability's somewhat general coverage is the more specific coverage of the implied warranty of fitness for a particular purpose. As discussed, the implied warranty of merchantability is an assurance that goods will perform the functions normally associated with that type of item. In comparison, the implied warranty of fitness for a particular purpose arises when the seller has reason to know the particular purpose for which the goods are to be used and where the buyer relies on the seller's skill and judgment to select suitable goods. For example, a buyer may be able to recover damages for breach of the implied warranty of fitness for a particular purpose, where the buyer has made the purpose of his purchase of a new precipitator very clear to the seller, but the precipitator fails to meet regulatory standards for the stated purpose of the buyer. (48)

Like the disclaimer for the implied warranty of merchantability, a disclaimer of the implied warranty of fitness for a particular purpose must be a conspicuous writing. With respect to this particular warranty, the UCC Article 2 provides language that will effectively serve as a disclaimer. It provides, "[t]here are no warranties which extend beyond the description on the face hereof." (9) Of course, other clear and conspicuous language of disclaimer will suffice, but, for obvious liability avoidance reasons, sound practice would include the version contained in the UCC Article 2.

(3) Implied Warranty of Title

The warranty against infringements is another UCC Article 2 implied warranty applicable where a merchant regularly dealing in goods of the kind sold warrants that the goods sold are delivered free of any patent, trademark, copyright, or other similar intellectual property infringement claims. Some jurisdictions, however, deny the buyer a remedy unless the buyer actually is prevented from using the product as the result of the infringement. For this warranty, an exception to its applicability exists where the buyer furnishes specifications for the goods. In this instance, the buyer impliedly holds the seller harmless or indemnifies the seller against claims deriving from an alleged breach of this warranty.

A third UCC Article 2 warranty is the implied warranty of title, which holds that a seller of goods warrants good title transferred in connection with the goods. A seller may modify or entirely disclaim the warranty of title, but only with clear and specific language. Disclaliners of the warranty of title are commonly found at sheriff sales, for example, where title to the goods is unclear. This warranty is disclaimed or modified only with specific language or circumstances that give the buyer reasons to know that the seller does not claim clear title to the goods. (50)

(4) Warranty Against Infringements

Warranties in Service Contracts

As mentioned earlier, the implied warranties of the UCC Article 2 do not apply to contracts for services. (51) In some jurisdictions, however, common law provides for a general implied warranty of good workmanship, or at least non-negligent performance. (52) Thus, through these warranties implied by the operation of common law, a buyer of services may be afforded at least some minimal protection.

If the parties to a service contract wish to extend warranty coverage into other areas, express warranties under service contracts are permissible. When drafting a warranty provision for a service contract, it is best to include objective criteria for evaluating performance, rather than subjective criteria. For example, in an insect fumigation contract, an effective warranty clause might guarantee 95 percent elimination of insects, as opposed to a less effective clause that provides for "satisfactory" elimination of insects.

Future Developments

In the area of computer technology, a revision to the UCC Article 2 is underway. Uniform Computer Information Transaction Act, or proposed Article 2B to the UCC ("UGC Article 2B"), is aimed at providing legal coverage tailored specifically to the information technology industry. Accordingly, transactions involving computer software and electronic information are the chief objective of the coverage of UCC Article 2B. The proposed article, however, has been very controversial, and finalization of a draft of the proposed law continues to be debated.

One of the features of the proposed UCC Article 2B is that it contains an implied warranty of merchantability tailored specifically for software and electronic information transactions. Disclosure rules will remain the same as with the implied warranty of merchantability applicable to the sale of goods under the UCC Article 2. That is, disclaimer of UCC Article 2B's implied warranty of merchantability must mention merchantability specifically and have conspicuous placement within the contract.

The proposed article also contains an implied warranty of informational content, which provides a guarantee of data accuracy. This warranty is subject to disclaimer, and the seller should be certain to include one if guaranteeing data accuracy is not appropriate. Similar to the implied warranty of fitness for a particular purpose, an implied warranty of system integration exists in the proposed article provision as well. Again, the seller can disclaim the warranty where appropriate.

Conclusion

Contract professionals should consider the unique aspects of risk in every contract when negotiating and drafting terms for limitation of liability, indemnification, and warranty. In addition, contract professionals should consult the law in the relevant jurisdiction.

Importantly, when negotiating or drafting risk allocation terms, a contracting party should consider all the allocation terms together to ensure that the terms work in concert (or at least do not conflict), collectively maximizing the benefits of all such terms. Proper use of these risk allocation terms can permit the parties to develop a comprehensive contractual framework for allocating contract risk and potential contract liability. A full understanding of the nature of risk allocation terms for limitation of liability, indemnity, and warranty, and the benefits and limitations of these terms, will position contract professionals to effectively negotiate, draft, and manage risk allocation arising under each commercial contract.

Endnotes

(1.) UCC [section] 2-719; see Montgomery County v. Microvote Corp., Case No. A-97-6331 2001 WL 722150, at *5.6 (E.D. Pa., June 25, 2001); Computrol, Inc. v. Newtrend, LR, 203 F.3d 1064 (8th Cir. 2000).

(2.) Allen Brothers, Inc. v. Abacus Direct Corp., Case No. 01-C-6158, 2002 WL 237872 (W.I. III. Feb. 19, 2002).

(3.) Compare, Sulzer Carbomedics Inc. v. Oregon Cardio-Devices, Inc., 257 F.3d 449 (5th Cir. 2001) (damages sought for compensation of tortuous interference claim arising under contract).

(4.) Computrol, 203 F.3d at 1070.

(5.) UCC [section]52-719(1) and (2); see Montgomery County, 2001 WL 722150 (attempted limitation of liability term for exclusive remedy of repair and replacement authorized but failed for lack of clarity).

(6.) UCC 52-719(2).

(7.) Kronos Products, Inc. v. Sasib Bakery North America, Inc., 2002 WL 1308637 (N.D. Ill. June 14,2002) (collecting cases from various jurisdictions that would provide any remedy under the UCC Article 2, versus jurisdictions that would retain limitations on remedies in the contract when an exclusive remedy fails).

(8.) Id.

(9.) Maschinenfabrick, GmbH v. Max Levy Auto graph, Inc., Case No. CIV.A. 01-1083 2002 WL 126634 (E.D.Pa. June 31, 2002) (bad faith breach resulted in availability of all damages).

(10.) UCC [section] 2-719(2).

(11.) Computrol, 203 F.3d at 1069; Allen Brothers, 2002 WL 237872 at *1; Sulzer Carbomedics, 257 F.3d at 451.

(12.) Computrol, 203 F.3d at 1069.

(13.) UCC [section] 2-718(1).

(14.) UCC [section] 2-718(1).

(15.) UCC [section] 2-719(2).

(16.) SI Communications, Inc. v. Nielsen Media Research, 181 F. Supp. 2d 404, 412-13 (S.D. NY 2002).

(17.) UCC [section] 2-719(3).

(18.) SI Communication, 181 F. Supp.2d at 412-13.

(19.) UCC [section] 2-719(3); see e.g., SI Communications, 181 F. Supp.2d at 41 2-13.

(20.) UCC [section] 2-302 and 2-719(3).

(21.) Black's Law Dictionary 769 (6th ed. 1990). Subrogation, closely related to indemnity, is the right of one who has paid an obligation of another to be indemnified by the other. Id. at 1427.

(22.) Williston, A Treatise on the Law of Contracts 52:19 (Vol. 1, 4th ed., 1990).

(23.) Id.

(24.) Fina, Inc. v. ARCO, 200 F.3d 266 (5th Cir. 2000).

(25.) Katzner v. Kelleher Construction, 545 N.W.2d 378 (Minn. 1996).

(26.) Grunman Systems Support Corp. v. Travelers Indemnity Co., 828 F. Supp. 11 (E.D.N.Y. 1993).

(27.) See Feuer v. Menkes Feuer, Inc., 187 N.Y.S.2d 116 (N.Y. App. Div. 1959).

(28.) Feldman and Nimmer, Drafting Effective Contracts: A Practitioner's Guide 5.106[A][9] (2d. ed., 2002 Supp.).

(29.) Id.

(30.) Id. at [section] 2.02[F][3].

(31.) Id.

(32.) Id.

(33.) United States Fidelity and Guaranty Co. v. Housing Authority of the City of Poplar Bluff, 114 F.3d 693 (8th Cir. 1997).

(34.) Saidman, Shimizu, and Steinberg, Doing Deals 2007: Understanding the Nuts and Bolts of Transactional Practice: Software Licensing, 1228 PLI/Corp 933 (2001).

(35.) Feldman and Nimmer, Drafting Effective Contracts: A Practitioner's Guide 2.02 [F][2] (2d. ed., 2002 Supp.).

(36.) Paccon v. United States, 399 F.2d 162 (Ct. Cl. 1968).

(37.) Lecates v. Hertrich Pontiac Buick Co., 515 A.2d 163 (Del. Super. 1986).

(38.) UCC [section] 2-105(1).

(39.) For examples of cases involving services, see Sears, Roebuck & Co. v. Enco-Assoc., 372 N.E. 2d 555 (N.Y. 1977) (architectural drawings); Jones v. Clark, 244 S.E. 2d 183 (N.C. App. 1978) (lab testing); Brown v. Christopher Inn Co., 344 N.E. 2d 140 (Ohio App. 1975) (hotel room rental).

(40.) Milan Assoc. v. North Ave. Dev. Corp., 368 N.Ed. 2d (N.Y. 1977); Bonebrake v. Cox, 499 F.2d 951 (C.A. Iowa 1974).

(41.) Berry v. G.D. Searle & Co., 309 N.E.2d 550 (III. 1974); Chutich v. Samuelson, 518 R2d 1363 (Cob. App. 1973).

(42.) UCC [section] 2-213.

(43.) UCC [section] 2-314.

(44.) UCC [section] 2-315.

(45.) UCC [section] 2-312(1).

(46.) UCC [section] 2-312(3).

(47.) VLN Corp. v. American Office Equip., 536 P.2d 863 (Colo. App. 1975).

(48.) Colorado Ute Elec. Ass'n., Inc. v Envirotech Corp., 524 F. Supp. 1152 (D. Cola. 1981).

(49.) UCC [section] 2-316(2).

(50.) UCC [section] 2-312(2).

(51.) Roses Litho Supply Corp. v. Hanson, 462 N.E. 2d 566 (III. App. 1984).

(52.) National Fire Ins. Co. v. Westgate Constr. Co., 227 F. Supp. 835 (D.C. Del. 1964).

About the Authors

STEVEN M. MASIELLO is an attorney in the contracts & technology department of the law firm. McKenna Long & Aldridge LIP, in Denver, Colorado. He has been a member of NCMA since 1993 and has participated as a speaker in several NCMA-sponsored seminars. Mr. Masiello is affiliated with the Denver Chapter.

MICHAEL D. SCHAG is an attorney in the contracts & technology department of McKenna Long & Aldridge LIR Mr. Schag is a professor at Embry-Riddle Aeronautical University, where he teaches graduate courses relating to commercial law. Mr. Schag is a member of NCMA's Denver Chapter.

SANDRA B. WICK is an attorney in the litigation department of McKenna Long & Aid ridge LIR Ms. Wick focuses her practice on commercial and civil litigation. Send comments on this article to cm@ncmahq.org.
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Author:Masiello, Steven M.; Schag, Michael D.; Wick, Sandra B.
Publication:Contract Management
Article Type:Brief Article
Geographic Code:1USA
Date:Sep 1, 2002
Words:6109
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